Question

Garden Sales, Inc., sells garden supplies. Management is planning its cash needs for the second quarter. The company usually has to borrow money during this quarter to support peak sales of lawn care equipment, which occur during May. The following information has been assembled to assist in preparing a cash budget for the quarter:

1. Budgeted monthly absorption costing income statements for April–July are:

	April		May		June		July
Sales	$	690,000	$	860,000	$	570,000	$	470,000
Cost of goods sold		483,000		602,000		399,000		329,000
Gross margin		207,000		258,000		171,000		141,000
Selling and administrative expenses:
Selling expense		87,000		106,000		68,000		47,000
Administrative expense*		48,500		65,600		42,200		45,000
Total selling and administrative expenses		135,500		171,600		110,200		92,000
Net operating income	$	71,500	$	86,400	$	60,800	$	49,000

*Includes $29,000 of depreciation each month.

2. Sales are 20% for cash and 80% on account.

3. Sales on account are collected over a three-month period with 10% collected in the month of sale; 70% collected in the first month following the month of sale; and the remaining 20% collected in the second month following the month of sale. February’s sales totaled $265,000, and March’s sales totaled $280,000.

4. Inventory purchases are paid for within 15 days. Therefore, 50% of a month’s inventory purchases are paid for in the month of purchase. The remaining 50% is paid in the following month. Accounts payable at March 31 for inventory purchases during March total $126,700.

5. Each month’s ending inventory must equal 20% of the cost of the merchandise to be sold in the following month. The merchandise inventory at March 31 is $96,600.

6. Dividends of $36,000 will be declared and paid in April.

7. Land costing $44,000 will be purchased for cash in May.

8. The cash balance at March 31 is $58,000; the company must maintain a cash balance of at least $40,000 at the end of each month.

9. The company has an agreement with a local bank that allows the company to borrow in increments of $1,000 at the beginning of each month, up to a total loan balance of $200,000. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the quarter.

Required:

1. Prepare a schedule of expected cash collections for April, May, and June, and for the quarter in total.

2. Prepare the following for merchandise inventory:

a. A merchandise purchases budget for April, May, and June.

b. A schedule of expected cash disbursements for merchandise purchases for April, May, and June, and for the quarter in total.

3. Prepare a cash budget for April, May, and June as well as in total for the quarter.

Answer 1

1.

Cash collections schedule
	April	May	June	Quarter
Cash Sales	$   1,38,000	$     1,72,000	$      1,14,000	$   4,24,000
Credit Sales Collection
Feb Sales	$      42,400			$      42,400
Mar Sales	$   1,56,800	$        44,800		$   2,01,600
April Sales	$      55,200	$     3,86,400	$      1,13,600	$   5,55,200
May Sales		$        68,800	$      4,81,600	$   5,50,400
June Sales			$         45,600	$      45,600
Total Cash Collections	$   3,92,400	$     6,72,000	$     7,54,800	$18,19,200

2a.

Merchandise Purchases Budget
	April	May	June	Quarter
Budgeted cost of goods sold	$   4,83,000	$     6,02,000	$      3,99,000	$ 14,84,000
Add desired ending inventory	$   1,20,400	$        79,800	$         65,800	$      65,800
Total needs	$   6,03,400	$     6,81,800	$      4,64,800	$ 15,49,800
Less beginning inventory	$      96,600	$     1,20,400	$         79,800	$      96,600
Required purchases	$   5,06,800	$     5,61,400	$     3,85,000	$14,53,200

2b.

Schedule of Expected Cash Disbursements for Merchandise Purchases
	April	May	June	Quarter
March purchases	$   1,26,700			$   1,26,700
April purchases	$   2,53,400	$     2,53,400		$   5,06,800
May purchases		$     2,80,700	$      2,80,700	$   5,61,400
June purchases			$      1,92,500	$   1,92,500
Total cash disbursements for purchases	$   3,80,100	$     5,34,100	$     4,73,200	$13,87,400

3.

Cash Budget
	April	May	June	Quarter
Beginning Balance	$      58,000	$        40,800	$         40,100	$      58,000
Cash Collections	$   3,92,400	$     6,72,000	$      7,54,800	$ 18,19,200
Total Cash Available	$   4,50,400	$     7,12,800	$      7,94,900	$ 18,77,200
Cash Disbursements
Purchases	$   3,80,100	$     5,34,100	$      4,73,200	$ 13,87,400
Selling Expense	$      87,000	$     1,06,000	$         68,000	$   2,61,000
Administrative Expense	$      19,500	$        36,600	$         13,200	$      69,300
Dividend paid	$      36,000			$      36,000
Land Purchases		$        44,000		$      44,000
Total Cash Disbursements	$   5,22,600	$     7,20,700	$      5,54,400	$ 17,97,700
Preliminary Ending Balance	$     -72,200	$         -7,900	$      2,40,500	$      79,500
Financing
Borrowings	$   1,13,000	$        48,000		$   1,61,000
Repayment			$    -1,61,000	$ -1,61,000
Interest			$          -4,350	$       -4,350
Total Financing	$   1,13,000	$        48,000	$    -1,65,350	$       -4,350
Ending Balance	$      40,800	$        40,100	$         75,150	$      75,150